HARTFORD, CT — The House and Senate voted unanimously Wednesday to amend Connecticut’s state and local tax laws to blunt the impact of the Tax Cuts and Jobs Act signed by Republican President Donald Trump in late 2017.
The bill creates a new pass-through entity tax — and an additional tax credit — to help offset the impact of the federal law on pass-through entities. It also allows municipalities to provide a property tax credit to eligible taxpayers who make voluntary payments to municipally approved “community supporting organizations.”
It also extends by three years the phase-in of the state estate and gift tax threshold to the federal threshold; authorizes the Connecticut Green Bank to secure its obligations under a lease-purchase agreement with a reserve fund even though it did not receive the statutorily required approvals for such agreement.
With regard to the change in the state estate and gift tax threshold, currently estates and gifts valued at up to $5.1 million are exempt. That threshold will nearly double to $9.1 million in 2022, and then will be pegged to the federal threshold in 2023 with a 12 percent tax rate on estates above the threshold.
Lastly, it requires the Economic and Community Development commissioner to study and report on the best practices for marketing the benefits of qualified opportunity zones in order to increase investment in distressed census tracts and municipalities.
Sen. L. Scott Frantz, R-Greenwich, said he knows it’s likely that if Connecticut passes the bill, “it’s going to be challenged by the federal authorities, by the IRS in the particular, but we have to try.”
Asked by fellow Sen. Len Suzio, R-Meriden, what the chances are of the federal government challenging Connecticut, Frantz answered “better than 50-50.”
But, Frantz reiterated, “We have to try.”
During public hearing testimony on the bill, Office of Policy and Management Secretary Ben Barnes endorsed the changes.
The bill would ensure Connecticut remains competitive under the new federal tax regime, Barnes said, by “establishing a revenue neutral tax on pass-through entities offset by a personal income tax credit that will provide Connecticut’s small business owners with favorable federal tax treatment.”
“If all such income is taxed at the maximum federal rate of 37 percent, this proposal would shield an estimated $600 million from federal taxation and would thereby return an estimated $222 million to Connecticut taxpayers,” Barnes testified.
Barnes said allowing municipalities to create charitable organizations “will allow our cities and towns to continue to provide important services while reducing individuals’ federal taxes.”
In January, the governors of Connecticut, New York, and New Jersey said they plan to file a lawsuit against the federal government claiming the tax plan offends the concept of federalism and tramples states rights.
The $10,000 cap on state and local tax deductions severely impacts 12 states, and those states are forming a coalition to file a legal action challenging the constitutionality of that provision, the governors said.
In Connecticut, the cap on state and local taxes would likely impact 171,118 filings representing hundreds of thousands of individuals. Those filings represent $10 billion in deductions they otherwise would have been able to claim, if they had not been capped.
“In so many ways these changes discriminate against our states, against our economies, against the individual citizens who live within our states and somebody has to stand up and say not at this time,” Gov. Dannel P. Malloy said in January during a joint press conference with the governors of New York and New Jersey.
“It is fundamentally unfair and illegal,” Malloy said.
It’s unclear how many residents Connecticut might be helped by that change.